A lot has been made of Chesapeake Energy Corporation (NYSE:CHK)’s sales this year. We’ve wondered if the company had been ripped off when it entered into a joint venture with some of its Mississippi Lime acres. We’ve also pondered if the company was simply now in fire-sale mode to meet its budgetary needs; it’s no secret that Chesapeake Energy Corporation (NYSE:CHK)’s greatest challenge is funding its growth plans.
Source: Chesapeake Energy
The thing is, when you look back at all these sales, you see that the asset exodus has one thing in common. None of these assets are actually core to the company’s business. Take its two recent sales in the Marcellus, a $93 million sale of 162,000 acres to Southwestern Energy Company (NYSE:SWN) and a $113 million sale of 99,000 acres to EQT Corporation (NYSE:EQT) . In both cases we have a sale of acres outside of what Chesapeake Energy Corporation (NYSE:CHK) has deemed its “core of the core.” Further, both sales had little current production.
The EQT Corporation (NYSE:EQT) sale included just three currently producing wells with another seven scheduled to come on line by the end of the year. In total these wells represent about a billion cubic feet equivalent of production. What’s even more interesting, EQT Corporation (NYSE:EQT) pointed out that almost half of the acres it was acquiring wouldn’t even be developed as many had near-term lease expirations while others were too scattered to be developed.
The Southwestern deal also included little current production as the 17 gross wells only produce 2 MMcf of natural gas per day. These were largely undeveloped acres much closer to Southwestern’s current leasehold than Chesapeake Energy Corporation (NYSE:CHK)’s core acreage. Again, we see an instance where the company was able to jettison an asset that really didn’t have a whole lot of value for Chesapeake.
Even more recently we’ve seen Chesapeake Energy Corporation (NYSE:CHK) sell off some of its remaining midstream assets. In one deal it sold certain of its Granite Wash assets to Markwest Energy Partners LP (NYSE:MWE) for $245 million in cash, while in an earlier deal Chesapeake sold its Mississippi Lime gathering and processing assets to the SemGroup Corp (NYSE:SEMG) for $300 million.
There’s one other key takeaway from these deals. While Chesapeake Energy Corporation (NYSE:CHK) is getting cash up front, it’s also saving itself hundreds of millions in future capex. Take the SemGroup Corp (NYSE:SEMG) deal, which included the Rose Valley I and II processing plants. The first plant won’t be operational until early next year, while the second plant has a 2016 start date. Further, it will require another $125 million in additional capital expenditures to bring both plants online.
It’s a similar story with the Markwest Energy Partners LP (NYSE:MWE) deal. To support Chesapeake’s drilling program related to the assets its acquiring, Markwest Energy Partners LP (NYSE:MWE) will need to invest another $90 million over the next five years. Here again Chesapeake Energy Corporation (NYSE:CHK) is not only getting cash up front but its cutting out future capital expenditures.
That being said, Chesapeake isn’t getting something for nothing. In both of these deals the company signed long-term processing and gathering agreements. In the Markwest Energy Partners LP (NYSE:MWE) deal, it anticipates generating $30 million in EBITDA from the deal next year with EBITDA growing to more than $50 million by 2017. In the SemGroup Corp (NYSE:SEMG) deal Chesapeake Energy Corporation (NYSE:CHK) committed to a 20-year, 100% fee-based, gas gathering and processing agreement. While Chesapeake could have earned a little more by keeping these assets in house, it sees a better opportunity to reinvest the proceeds from the deal into the core of its core acreage.
To sum everything up, Chesapeake Energy Corporation (NYSE:CHK)’s divestitures this year have jettisoned very little actual oil and gas production. Instead, the company has been paring off its excess acreage and assets to save the company hundreds of millions in future capex. The company can take the money it received in the deals, and the funds that would have been required to fully develop those assets, and plow that money into its core assets. There’s little doubt that Chesapeake could have gotten more money for these assets if it didn’t need the cash, but these deals do allow the company to keep its most prized assets while making the best of its situation.
The article The Chesapeake Asset Exodus Continues originally appeared on Fool.com.
Motley Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy Corporation (NYSE:CHK), Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.
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